February 2025 One-Minute Reads

ISS issues statement regarding consideration of diversity factors in US director election assessments

Institutional Shareholder Services (ISS) announced that due to the recent increased attention on diversity, equity and inclusion (DEI) practices, including the issuance of presidential executive orders on DEI, for shareholder meeting reports published on or after February 25, 2025, it will no longer consider board gender and racial and/or ethnic diversity when making vote recommendations with respect to the election or re-election of directors at US companies under its benchmark and specialty policies. See this presidential action and this presidential action.

Vanguard releases 2025 proxy voting guidelines

Vanguard has issued its 2025 proxy voting policy for US portfolio companies, which became effective on February 1, 2025. The updates focus on board composition and diversity (removing prior language providing for negative votes against nominating chairs for insufficient action to achieve “appropriately representative” board composition, as well as language stating that boards should, “at a minimum, represent a diversity of personal characteristics, inclusive of at least diversity in gender, race, and ethnicity on the board”), overboarding (limits now apply to any director who is a public company executive, not just to named executive officers), and shareholder proposals (significantly cuts back on examples of environmental and social proposals that funds may support, removing references to requests for greenhouse gas emissions reporting in Scopes 1 and 2 and material Scope 3 categories, requests for climate scenario analysis, requests for workforce demographics disclosures, including EEO-1 reports, requests to disclose approaches to board diversity, or requests to include additional protected classes in diversity policies). For a detailed discussion of Vanguard’s and BlackRock’s 2025 updates, see this February 5 Cooley alert. For further reading, see this Reuters article, this ESGDive article and this February 6 blog post from The Governance Beat.

Nasdaq proposes rule change to modify certain initial listing liquidity requirements

In late December 2024, the Securities and Exchange Commission (SEC) noticed Nasdaq’s proposal to modify Listing Rules 5405 and 5505. Nasdaq’s proposed changes would require any company listing – in connection with an initial public offering (IPO) – on the Nasdaq Global Market or Nasdaq Capital Market to satisfy the applicable minimum requirement of the market value of unrestricted publicly held shares (MVUPHS) solely with the proceeds of the offering. Nasdaq is proposing similar changes that would affect companies uplisting to Nasdaq from the US over-the-counter (OTC) market in conjunction with a public offering.

Nasdaq defines “unrestricted publicly held shares” as shares that are not held by an officer, director or 10% shareholder of the company, and that are not subject to resale restrictions of any kind. When a company is listing in conjunction with a public offering, previously issued shares registered for resale (“resale shares”) and shares not held by an officer, director or 10% shareholder of the company are counted as unrestricted publicly held shares, in addition to the shares being sold in the offering. Nasdaq has observed that companies that meet the applicable MVUPHS requirements by including resale shares have experienced higher volatility with their securities on the date of listing than those who met the requirements with only proceeds from their offering. Nasdaq believes that resale shares may not contribute to liquidity to the same degree as shares sold in a public offering, and thus believes it is appropriate to modify the rules to exclude resale shares from the calculation of MVUPHS. For further insight, see this December 2024 PubCo post.

SEC settles negligence-based charges for misleading investors regarding cyber incident

On January 13, 2025, the SEC settled charges against Ashford for materially false and misleading disclosures to investors regarding a cyber incident. According to the SEC’s original complaint, Ashford learned in September 2023 that the company had been subjected to a cybersecurity attack and ransomware demand by a foreign-based threat actor. Allegedly, the threat actor gained access to Ashford’s servers and exfiltrated more than 12 terabytes of data that was stored on Ashford’s internal computer systems as part of the attack – including, among other things, sensitive hotel guest information.

In a quarterly report filed with the SEC in November 2023, the company indicated that it had “completed an investigation” and had “not identified that any customer information was exposed.” Ashford made similar disclosures in two additional quarterly reports, along with Ashford’s annual report filed with the SEC for the period ending December 31, 2023.

However, the SEC claims that the company knew, or should have known, that the exfiltrated data contained sensitive personally identifiable information and financial information related to guests. Ashford agreed to settle the SEC’s charges, consenting to an injunction and an order to pay a civil penalty of $115,231, which takes into account Ashford’s assistance to SEC staff in its investigation. The settlement is subject to court approval. See also this TheCorporateCounsel article.

SEC charges former CEO for failing to disclose to WWE settlement agreements he executed on its behalf

On January 10, 2025, the SEC announced settled charges against Vince McMahon, the former executive chairman and CEO of World Wrestling Entertainment (WWE), for signing 2019 and 2022 settlement agreements on behalf of himself and WWE without disclosing the agreements to the company’s board of directors, legal department, accountants, financial reporting personnel or auditor. In doing so, the SEC alleged that McMahon circumvented WWE’s system of internal accounting controls and caused material misstatements in WWE’s 2018 and 2021 financial statements.

According to the SEC’s order, one settlement agreement obligated McMahon to pay a former employee $3 million in exchange for her agreement to not disclose her relationship with McMahon and her release of potential claims against WWE and McMahon. The other settlement obligated McMahon to pay a former WWE independent contractor $7.5 million in exchange for her agreement to not disclose her allegations against McMahon and her release of potential claims against WWE and McMahon. The SEC’s order finds that WWE did not evaluate the disclosure implications or the appropriate accounting for these transactions in its financial statements, as McMahon failed to disclose either agreement to WWE. According to the order, WWE overstated its 2018 net income and its 2021 income by approximately 8% and 1.7%, respectively, because the payments required by the agreements were not recorded. In addition, the SEC order also claims that these payments should have been disclosed as related-party transactions.

Further findings of the order include that McMahon signed management representation letters provided to WWE’s auditor that did not disclose the existence of either settlement agreement, and that after learning of the settlement agreements, WWE issued a restatement of its financial statements in August 2022. McMahon consented to the entry of the SEC’s order finding that he violated the Securities Exchange Act by knowingly circumventing WWE’s internal accounting controls, and that he directly or indirectly made or caused to be made false or misleading statements to WWE’s auditor. The order also finds that McMahon caused WWE’s violations of the reporting and books and records provisions of the Exchange Act. Without admitting or denying the SEC’s findings, McMahon agreed to a cease-and-desist order for violating those provisions, along with paying a $400,000 civil penalty and reimbursing WWE $1,330,915.90 pursuant to Section 304(a) of the Sarbanes-Oxley Act. For further insight, see this Cooley PubCo post and this TheCorporateCounesel article.

SEC charges company for misleading statements about AI product

On January 14, 2025, the SEC announced settled charges against Presto Automation, a restaurant-technology company, for making materially false and misleading statements about critical aspects of its flagship artificial intelligence (AI) product, Presto Voice. Presto Voice employs AI-assisted speech recognition technology to automate aspects of drive-thru order-taking at quick-service restaurants. According to the SEC’s order, Presto made false and misleading claims about Presto Voice in SEC filings and public statements from November 2021 through May 2023. The order found that Presto’s statements regarding the technology powering Presto Voice were misleading, because Presto failed to disclose that, for a period of time, the AI speech recognition technology deployed in all units of Presto Voice was owned and operated by a third party. Subsequently, Presto did deploy Presto Voice units powered by its own AI speech recognition technology with certain customers, but it falsely claimed that its own AI product eliminated the need for human order-taking. In fact, the vast majority of drive-thru orders placed through this version of Presto Voice required human intervention. The SEC’s order also found that Presto misleadingly disclosed its reported rate of orders completed without human intervention using this technology. Presto consented to a cease-and-desist order, and the SEC did not impose a civil penalty against Presto based on the company’s cooperation during the staff’s investigation and remedial efforts. See also this TheCorporateCounsel article.

SEC charges employee and tippers with insider trading in cannabis company

On January 16, 2025, the SEC filed charges against Anthony Marsico, Arthur P. Pizzello Jr., Robert Quattrocchi and Timothy Carey for alleged insider trading in the stock of Goodness Growth Holdings, a cannabis company now doing business as Vireo Growth, in advance of a February 1, 2022, public announcement that another cannabis company, Verano Holdings, was acquiring Goodness Growth in an all-stock transaction valued at approximately $413 million. On the day of the public announcement, Goodness Growth’s stock share price rose by nearly 42%. The SEC’s complaint alleges that the four unlawfully bought Goodness Growth stock based on material nonpublic information (MNPI) about the planned acquisition. The SEC’s complaint further claims that Marsico learned, through his employment as an executive of Verano, that Verano was planning to acquire Goodness Growth, and that Marsico tipped this MNPI to Pizzello, who then tipped Quattrocchi and Carey. Based on this MNPI, the four purchased shares of Goodness Growth stock in advance of the public announcement of the planned acquisition. The SEC’s complaint alleges that, based on their illicit trading in Goodness Growth stock, Marsico had unrealized gains of $661,549, Pizzello had unrealized gains of $124,456, Quattrocchi had realized and unrealized gains of $28,136, and Carey had unrealized gains of $9,260 at the close of the market on the day of the public announcement. The SEC’s complaint charges all four with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks conduct-based permanent injunctions, disgorgement, prejudgment interest and civil penalties against them, along with an order barring Marsico from serving as an officer or director of a public company.

SEC charges AI startup CEO and his wife with elaborate $60 million fraud involving fake financial documents and forged audit reports

On January 23, 2025, the SEC charged Alexander Beckman, the former CEO of GameOn, with defrauding investors out of more than $60 million by falsely inflating the financial performance and commercial success of GameOn. The SEC also charged Valerie Lau, Beckman’s wife and a licensed attorney, with fraud. As alleged in the SEC’s complaint, Beckman falsely represented to investors that GameOn, an artificial intelligence (AI) chat technology startup company that later changed its name to The ON Platform, had generated tens of millions of dollars in annual revenue and positive net income from dozens of contracts with high-profile customers. According to the complaint, the company’s actual annual revenue never exceeded $500,000, and the company was never profitable. Beckman allegedly provided investors with false financial statements, forged bank statements and fake revenue reports that falsely reflected significant revenue. The complaint also alleges that Lau, who was the general counsel at a venture capital firm, participated in Beckman’s deceptive scheme by, among other things, helping Beckman create and disseminate a fake audit report with the logo and signature of a prominent “Big Four” accounting firm. To perpetuate the fraud and conceal GameOn’s true financial status, Beckman also allegedly created fake email accounts impersonating several of GameOn’s financial consultants and bankers, and used those fictitious accounts to send false information to GameOn’s board of directors and to investors after the board raised questions about the company’s financial statements and cash position. Lau also allegedly emailed a counterfeit bank statement to a bank employee, which was ultimately handed to a GameOn board member, in an elaborate scheme to deceive the board member into believing the company had funds in its account when the balance was close to $0. As to both defendants, the complaint seeks permanent injunctions – including conduct-based injunctions, disgorgement plus prejudgment interest, civil penalties, and an officer and director bar.

SEC approves NYSE proposed rule change to restrict use of reverse stock splits in certain circumstances

On January 15, 2025, the SEC approved the New York Stock Exchange (NYSE) proposed rule change to amend Section 802.01C. The proposed rule provides that if a company’s security fails to meet the price criteria and the company has effected a reverse stock split over the prior one-year period or has effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 200 shares or more to one, then the company shall not be eligible for any compliance period specified in Section 802.01C, and the NYSE will immediately commence suspension and delisting procedures with respect to such security in accordance with Section 804.00. Furthermore, a listed company may not effectuate a reverse stock split if the effectuation of such reverse stock split results in the company’s security falling below the continued listing requirements of Section 802.01A. If a company effectively implements a reverse stock split notwithstanding this limitation, the company is not eligible to follow the procedures outlined in Sections 802.02 and 802.03, and the NYSE will immediately commence suspension and delisting procedures with respect to such security in accordance with Section 804.00. For further insight, see this Cooley PubCo post.

SEC approves Nasdaq proposed rule change to modify minimum bid price compliance periods and delisting appeals process

On January 17, 2025, the SEC approved Nasdaq’s proposed rule change to accelerate the delisting process for companies with shares that trade below $1.00. Per the proposal, a company would be suspended from trading on Nasdaq if the company was noncompliant with the $1.00 bid price requirement for more than 360 days. In addition, any company that has affected a reverse stock split within the prior one-year period but becomes noncompliant with the $1.00 minimum bid price requirement would immediately be sent a delisting determination without any compliance period. For more information on the new rule, see this Cooley PubCo post and this TheCorporateCounsel article. 

Nasdaq proposes removal of board diversity rule

Nasdaq has filed a proposal with the SEC to change Nasdaq’s Listing Rules to reflect a federal court’s vacatur of the SEC’s order of August 6, 2021, approving rules related to board diversity disclosure. The SEC declared the proposal to be immediately effective. See this Cooley PubCo post and this Bloomberg Law article. 

This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as “Cooley”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Do not send any confidential information to Cooley, as we do not have any duty to keep any information you provide to us confidential. This content may be considered Attorney Advertising and is subject to our legal notices.